Carrier femtocell pricing doomed?

I’ve been a proponent of the femtocell concept since the first rumblings of the concept came out of the startup community. We like femtocells -- everything about the topic. And really, what’s not to like about something that gives you a “five bar” wireless experience inside your home?

Femtocells are simple devices. They have a radio to talk to your cell phone and they have an Ethernet port to send and receive the IP-based voice and data info from the network. With users ‘getting’ Vonage, Skype and Wi-Fi these days, the only thing really hard to understand about a femtocell is how to spell it. And if you’ve seen commentators complain that femtocells are hard to install, don’t believe it. We’ve checked out femtocells from vendors such as ip.access and Samsung, and the end-to-end process of installation and activation is a breeze.

But now that I’ve seen some of the initial telco offerings taking shape and deployments looming, we’re disappointed with the word on the street about femtocell pricing. Carriers are thinking like telcos, not consumer electronics manufacturers. They’re taking something quite simple and making it complex – just like the rest of their cell phone plans.

Well, business modeling for carriers is something at which we excel. We have created picocell and FMC financial models for vendors to show the carriers, and have analyzed a fair share of femtocell ones, but rather than bore you with a long set of calculations about tower radios, erlangs, backhaul and soft handoff impacts on tower capacities, let’s boil this down to some definite “truths”:

• Carriers can save money by offloading traffic from towers to femtocells. Femtocells can save a carrier money by offloading the 30-plus% of calls made in homes to their customer’s lower-cost broadband connections (broadband connections that may or may not be on their network even). The advent of “unlimited” plans will likely mean more of these minutes will originate or terminate in the home.
• Savings on voice calls alone isn’t going to make a business case for femtocells. Voice just doesn’t eat up all that much bandwidth – but data applications (and especially mobile video) do, and can greatly improve a “cost savings only” business case for femtocells. But today’s femtocell unit costs and growing-but-still-relatively-low data use mean that carriers can’t afford to just “give away” femtocells and make the business case on cost savings alone.
• Don’t expect near term capex/opex savings to save the day. In the beginning, femtocells don’t really help with network capital, and may not help much with opex. In theory, you can avoid building or growing cellsites because of femtocells. Unfortunately, that’s only true if you have enough femtocell density in an area to make additional tower capacity unnecessary, or to significantly limit the traffic (and backhaul requirements) on that site. That density is not likely to happen anytime soon, even with massive adoption of femtocells.

The first inklings of expected voice-focused femtocell pricing in the U.S. offers to provide a femtocell for $50 plus an extra $15 to $30 month for the service (the latter for family plans). That may not seem over the top – especially with the added benefit of unlimited in-home minutes added in – but it is, in essence a 33% increase in the average customer’s $45 a month cell phone bill. That’s a pretty whopping increase – and one that really makes femtocells a lot less attractive from a consumer perspective. It opens the door for competitive counterstrike, and displeases customers who believe they should already be receiving high quality signals in their homes.

I think that carriers should think of femtocells as a consumer device and not a service. We think penetration and planting the in-home flag is more important than the small amount of incremental revenue to be gotten from monthly charges here. The long-term cost savings favor this.

If the iPhone showed you anything, it’s that people will pay for something they’ll use. But they also don’t like paying more than they already are for their existing cellular service – mobile TV anyone?

Consumers regularly make one-time purchases for accessories that improve the services and devices in their home. For example, Logitech has made a great business out of selling $300 Harmony remotes to people who want better control of their HDTVs and home theaters. And while they’re cheap now, early Wi-Fi access points were bought in huge numbers by consumers willing to spend as much as $300 to improve and expand their broadband connection into the home – while they shunned carrier attempts to lease them a “home networking service”.

A simple hardware femtocell sale makes more sense – and as data usage grows, the cost-savings business case becomes easier to make based solely on operating expense savings. Monthly-rated plans will just slow sales and present opportunity to a competitor who’s going to sell low-cost femtocells because they don’t need the monthly revenue to make their business case (they can treat the expense as a cost of acquisition even).

Look at the T-Mobile Wi-Fi services as a positive role model. T-Mobile offers its Wi-Fi FMC-based Hotspot @home service for free without the unlimited minutes plans. Minutes used just count towards their cell phones. Hey, that’s pretty simple.

Get the product out there and then layer on monthly services. Location-based services, presence services, and integration into the home network all provide revenue opportunities. But to get to that point, carriers should stop trying to turn their network coverage shortcomings into an immediate service – your sales and marketing expense is going to take a lot of work to sell that one. Over time, your model for femtocells may include a fully subsidized lease or service-based model (for example, include femtocells in your unlimited plans), but do you really want to slow down early adopters by nickel and diming them?

There are more than enough frustrated would-be early adopters to kick start the femtocell era – hundreds of thousands of them who are likely predisposed to just pay outright for a femtocell, if you price them near cost in accordance with volume purchases. If you can reduce churn, isn’t that worth any subsidy (if there is one)? And when data and video usage explodes, do you want to be caught with all that traffic on the towers?

Every home should have a femtocell but that’s not going to happen with only monthly services-based charges available to subscribers. Some carriers simply won’t be able to help themselves – they’re going to try to monetize femtocells with a monthly service fee. Not all carriers are going to do this, however, and competition will force those carriers who do start out with monthly pricing to move away from that model. It makes little sense to threaten early momentum with an unwise business plan.

So the end question is – can you afford to be a follower with femtocells?

Continue this conversation on our Unfiltered blog.